Slight Decline in Durable Goods Could Be Good News for the U.S. Economy

Two conflicting reports released yesterday (Thursday) have economists at odds as to what will happen next week, when both the advance estimate for first quarter gross domestic product (GDP) and the Federal Open Market Committee (FOMC) statement are released Wednesday.

"There seems to be a sense in the market that perhaps the worst is behind us," Julia Coronado, senior U.S. economist at Barclays Capitaltold MarketWatch. "There's a better sense of the magnitude of the problem."

The last time durable goods orders declined for a consecutive three-month stretch, the United States was headed into the 2001 recession. But despite the dire indicator this would seem to be, there is some good news for investors.

The 0.3% decline March comes on the heels of an upwardly revised 0.9% decline in February and a 4.4% drop in January, demonstrating an upward trend in the numbers. Also, if the 4.6% drop in autos is excluded, durable goods orders actually increased 1.5% for the month on the strength of overseas sales for American-made products.

A weak greenback and growing overseas economies in Asia and Latin America have kept foreign demand for U.S. manufactured goods such as computers and capital equipment high. Export levels are at record highs due to the dollar's 9% decline versus a basket of major global currencies over the past year.

The airline industry was one of the strongest areas of growth, with a 5.5% increase in commercial aircraft orders and a 29.4% increase in orders for defense aircraft, The Associated Press reported.

"The manufacturing sector is holding up as at least a partial offset to housing gloom," Derek Holt, an economist at Scotia Capital Inc. in Toronto, told Bloomberg News. "Alongside improving trade numbers, a feel-better story on manufacturing is emerging."

That's a good thing, because the housing story is gloomy. March new home sales were also released yesterday, and registered a drop of 8.5%, the Commerce Department announced. New home sales are at the lowest levels in almost two decades.

"It appears that the rumors of housing finding a bottom may just be that," President and Chief Economist Joel Naroff of Naroff Economic Advisors said in a note to clients yesterday. "But once again I raise the question: Given how far sales have already dropped, isn't it logical to expect a bottom sometime soon? I think so."

New-home sales dropped to a seasonally adjusted annual rate of 526,000, down from 575,000 the prior month. The current level is 36.6% lower than the level in March 2007. The median sales price declined 13.3% from a year before, the most in almost four decades, Bloomberg reported.

Housing inventories remain high, with a current 11-month supply.

Differing Economic Views

Some economists saw good news for the U.S. economy in yesterday's reports, while others did not.

But while it seems manufacturers are weathering the current U.S. economic slowdown better than expected, the drag from the housing market cannot be ignored.

"We have recession-type conditions," Mickey Levy, chief economist at Bank of America Corp. (BAC) in New York, said in an interview with Bloomberg Television. "I expect over the next three to four months continued weakness in durable goods, which means continued weakness in capital spending."

In fact, the housing slump is helping to keep durable goods orders low, as orders for household appliances wane. Despite the obvious weakness in the U.S. economy, the Federal Reserve might be running out of room to cut as inflation continues to ramp up and commodity prices surge.

"Given the GDP report comes out about six hours before the FOMC's statement will be released on April 30th, you have to suspect that the Fed will cut rates," Naroff said. "But given all the talk about food and price increases, the Committee has the cover to move to a balanced statement that reflects concerns about both inflation and growth and signals that future rate reductions are in doubt."

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